4 Alternatives to Debt Settlement

Quick Answer

Before trying debt settlement, consider these four less-risky alternatives, including using a debt management plan, trying a debt consolidation loan, applying for a balance transfer card or negotiating debt by yourself.

Two well dressed men settling debt.

If you're struggling to pay off debt, opting for debt settlement may seem attractive. You hire a debt settlement company and stop making debt payments in the short term in the hopes of paying less overall on what you owe in the long term.

But debt settlement comes with risks to your financial well-being and can do long-term damage to your credit. Instead, consider some alternatives to debt settlement that help you pay off debt with significantly less risk.

What Is Debt Settlement?

Debt settlement is when you work with a settlement company to negotiate your debt with creditors and settle for paying a lower amount than what you actually owe. Debt settlement companies are for-profit and may charge you 15% to 25% of the settlement amount.

A debt settlement company will have you stop paying your creditors as leverage, then try to negotiate a settlement amount on your behalf. In the meantime, you'll put money into a savings account managed by the debt settlement company for the amount you'll offer.

Depending on how much you owe, the debt settlement process can take up to three or four years. This means you will have years of missed payments and possibly charge-offs on your credit report, which can seriously damage your credit for many years and make it very difficult to work with lenders in the future.

For consumers who wish to avoid the risks of debt settlement, consider these four alternatives.

1. Credit Counseling

A nonprofit credit counseling agency can review your debt situation and recommend a course of action. They may recommend a similar-sounding but far safer option to debt settlement: a debt management plan (DMP).

With a DMP, a credit counselor also negotiates your debt on your behalf, but rather than having you stop making payments, they will work with your creditors to set up a payment plan that you can afford. As they negotiate with your creditors, your interest rates are often reduced and fees waived. You then make a single monthly payment to the credit counseling company, which in turn pays your creditors.

There is usually a small setup fee and ongoing monthly charge to manage your DMP. Your creditors that are part of the plan will likely close your accounts, which can affect your credit—but because you agree to pay your debt in full over three to five years, the effect will be far less than if you opted for debt settlement and stopped making payments altogether.

Non-profit credit counselors can also assist with other financial matters, such as budgeting, often for free.

2. Debt Consolidation

A way to reduce high interest charges and apply extra funds to debts from multiple sources is to take out a debt consolidation loan. If you're approved for a loan with a lower interest rate than what you're currently paying on your other debts, you could save a significant amount of money. You'll use the funds from your loan to pay off your other debts, then you'll work on paying off the loan.

The benefit of taking out a consolidation loan is twofold: First, you'll pay a lower interest rate, which will save you money. Second, consolidating your payments into a single monthly loan payment can help with your cash flow and budget planning.

It may even be possible to get a debt consolidation loan with bad credit, though your options may be limited. Check out consolidation loan options to see if you can get an interest rate and monthly payment that makes sense for your situation.

3. Balance Transfer Card

If the majority of your debt is on credit cards, a balance transfer card may be the answer to lowering your interest costs. Balance transfer cards allow you to bring the balance of your current credit card to a new card with better benefits.

These cards often come with an introductory 0% interest period of up to 21 months. You can use this time to pay down your balance without paying interest.

Balance transfers do come with a fee of about 3% or 5% of the balance transferred. You'll also need a good or better credit score to get approved for a balance transfer card, so it's a good move to make while you are still making regular payments on your debts.

4. DIY Debt Negotiation

One major downside of debt settlement companies is that they provide services you could perform yourself without the added cost. If you're willing to negotiate with your creditors yourself, you could save money and possibly limit damage to your credit.

Start negotiating with your lenders by asking about a workout agreement, where your lender reduces your interest rate or minimum monthly payment to help keep your payments coming in. If your debt problems are temporary, your lender may agree to forbearance or a hardship agreement, which can reduce your payments for a period of time while you get back on your feet.

Trying to settle your debt for less than you owe is another option, but it will have a greater negative effect on your credit than the other DIY options. In the end, it's almost always better to pay off the debt you owe than settle it for a lower amount.

The Bottom Line

If you're struggling to repay debt, investigate safer alternatives to debt settlement that can help your situation but reduce the negative effects on your credit and finances. When considering the options above, it's good to know where your credit stands to see what you may qualify for. Getting your free credit report and score from Experian is a good first step on your debt resolution journey.

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